Obesity drugs: broadly good for investors, with some strictures
The maker of Wegovy and Ozempic generated $2.4bn in sales from weight-loss treatments last year
Obesity drugs are generating a buzz to rival chatbots and quantum computers. Wegovy, an injectable drug, Ozempic and several other diabetic treatments have gone viral on social media. Elon Musk and Hollywood celebrities say they have used the drugs to shed weight.
One side effect of the treatments, which use a hormone to regulate appetite, should be scepticism. Wonder drugs, from Valium to Zantac, have a history of unintended consequences. But at least one slimming institution is giving obesity treatments an apparent vote of confidence: WeightWatchers.
Now called WW International, it is buying Sequence, a telehealth operator that can prescribe drugs including Wegovy and Ozempic. The $106mn deal is small. But a jump of up to 48 per cent in WW’s share price on Tuesday suggests the market thinks the transaction can tip the scale in the company’s favour.
Investors are rightly excited. Obesity affects about 650mn people worldwide. Almost half of Americans will be obese by 2030, a Harvard study found. About 18 per cent of healthcare spending would then go on related conditions.
Morgan Stanley thinks the market for weight-management medicines could reach $54bn over seven years — with $31.5bn of this from the US alone.
Companies behind new obesity treatments are flying. Novo Nordisk, the Danish group that makes Wegovy and Ozempic, generated DKr$16.9bn ($2.4bn) in sales from obesity treatments last year. Its shares are up 40 per cent over the past year. Eli Lilly, whose diabetes drug tirzepatide should get regulatory approval to treat weight loss this year, has risen 19 per cent.
Both are trading at steep premiums to Pfizer, whose shares have dropped 16 per cent as the Covid-19 vaccine sales boom faded.
Demand for the drugs is high. In the US, the challenge will be convincing insurers and government to pay for them. At $1,349 for four weekly shots per month, Wegovy is beyond the reach of most Americans — particularly the low-income groups where obesity is rife.
Germany reviews security risks posed by China’s 5G technology
Berlin examines use of Chinese components in its telecoms networks backed up by possible change in law
Germany is reviewing the use of Chinese components in its 5G network as Berlin scrutinises its ties with Beijing in the wake of Russia’s invasion of Ukraine.
The federal interior ministry said that the government was conducting a review of the security risks posed by components already installed in the country’s 5G networks — and that the authorities were also reviewing whether a change in the law was required.
“In particular, there are risks of misuse with regard to the security, confidentiality, integrity, availability or functionality of these critical telecommunications infrastructures,” it said. “Of course, it is also about not being too dependent on certain providers.”
The ministry added that the government was examining the need for a change in the law in order to “better exclude security risks and to be able to reduce dependencies on certain manufacturers.”
It would not confirm German media reports that the government was planning an outright ban on certain parts made by Chinese telecoms giants Huawei and ZTE, which have played a large role in German communications networks.
Germany for years took a more relaxed approach to Huawei technology in its telecoms networks, taking a sceptical view of US claims that the Shenzhen-based company had deep ties to the Chinese state.
It toughened the law two years ago, introducing rules that stopped short of an outright ban but gave authorities the power to refuse telecoms operators the right to use “critical components” of Chinese origin. The move was hailed at the time as an important step in limiting Beijing’s control over critical European infrastructure.
But the federal government last month admitted that it had “no conclusive information on the respective percentage ratio of components from Chinese and other manufacturers in German mobile and fixed networks”.
Janka Oertel, director of the Asia programme at the European Council on Foreign Relations, said that forcing Chinese vendors to phase out existing equipment “would be something that had been requested by security experts for a while”. Despite those calls, she said, operators continued to deploy Chinese technology “as they seemed to not have expected government action”.
A crucial issue, according to Thorsten Benner, director of the Berlin-based Global Public Policy Institute, was whether authorities would reassess the risks of Chinese technology not only in sensitive “core networks”, but also “access networks” which include masts that broadcast mobile signals.
“It’s unclear how far they will go, [and] what they will classify,” Benner said. “But if they go after most of the access network . . . that would be very far-reaching and an overdue step in my view.”
Berlin was forced to radically reassess the economic and security implications of its deep dependence on Russia for energy in the wake of Vladimir Putin’s invasion of Ukraine.
The harsh lessons learned through that experience, which saw Putin halt gas supplies to Europe, have prompted calls for a similar review of its dependencies on China.
Last year, the European Commission repeated a warning against the use of “high-risk vendors” in telecoms networks.
However, there remain deep divisions within Olaf Scholz’s three-way coalition government about how far it should go.
The Chinese government has previously threatened to retaliate if Berlin were to ban Huawei, though Beijing has so far stopped short of punishing other European countries that have already limited the use of Huawei since 2020, such as the UK and France.
The biggest telecoms operator in the UK, BT, said that removing Huawei equipment from its core network will cost it £500mn.
German officials have previously rebutted the idea of a Huawei-specific ban, saying that security standards would be applied equally to all vendors, in an attempt to avoid the diplomatic fallout caused by a ban that could be seen as focused on one company.
Huawei said in a statement that it has had “a strong security record in Germany” and that “restrictions [on] a reliable supplier with a strong security record will not make infrastructure more secure”.
LVMH: behemoth bets on beauty boss
Europe’s newly crowned biggest company stands out among its luxury peers
Two years ago, LVMH toppled Nestlé to become Europe’s biggest company. Since then its shares have surged by a half, fuelled most recently by China’s reopening. The scale of the French group is a source of strength, powering a formidable marketing machine. But it also raises questions about how it can maintain an aura of exclusivity, crucial to selling luxury goods.
An obsession with control characteristic of chair and chief executive Bernard Arnault is one answer. Witness LVMH’s beauty division, which this week acquired a new boss in Stephane Rinderknech. Most luxury brands license the cosmetics and fragrance side of their businesses to specialists such as Coty. But LVMH has insisted on managing the business in-house.
LVMH also maintains strict controls over distribution, relying heavily on its own retail network. Unlike some of its peers, the group did not permit the sale of unsold stock at a discount in the pandemic. That hit profitability last year. The perfume and cosmetics division, which accounts for about a tenth of sales, had an operating profit margin of 9 per cent, a third of LVMH’s average.
Rinderknech, a former L’Oréal executive, takes charge of the division at a time of growing competition. Luxury brands are increasingly extending into beauty. That takes them into closer rivalry with pure-play companies such as L’Oréal, Estée Lauder and Coty. They are attracted by strong demand trends and the role of beauty in recruiting customers.
LVMH’s share price performance over the past decade has been exceptional. Over the past ten years, investors have received total returns, with dividends invested, of 700 per cent. Now the shares trade on a forward price/earnings ratio of 26. That is about 15 per cent higher than the ten-year average and implies a forward PEG ratio (price/earnings divided by earnings growth) of more than two times, which investors tend to consider expensive.
There are indeed risks. LVMH would suffer if Chinese consumers turned against foreign brands. It would be hard hit if Louis Vuitton, its key profit driver, fell out of vogue.
However, the luxury market is a secular growth story. Wealthy consumers appear to have shrugged off inflationary pressures. LVMH stands out among its peers. Its pricing power, marketing prowess and distribution model merit a premium valuation.
Powell Says Fed Is Prepared to Speed Up Interest-Rate Rises if Economic Strength Continues
Fed chair’s appearance before the Senate Banking Committee offers opportunity to shape policy expectations ahead of March meeting
WASHINGTON—Federal Reserve Chair Jerome Powell said strong and sustained economic activity to start this year could prompt central bank officials to accelerate interest-rate increases and will likely lead them to lift rates more than they expected to combat high inflation.
Mr. Powell’s comments, prepared for delivery during the first of two days of Capitol Hill hearings on Tuesday, offered his first public acknowledgment that a pace of quarter-point interest-rate increases isn’t set in stone.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Mr. Powell said in the remarks prepared for delivery before the Senate Banking Committee. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
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The Fed raised its benchmark federal-funds rate by a quarter-percentage-point to a range between 4.5% and 4.75% last month, slowing the pace of rate rises following increases of a larger half-point in December and 0.75-point in November.
“We will continue to make our decisions meeting by meeting,” Mr. Powell said. “Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy.”
Since officials last met on Feb. 1, several economic reports have revealed hiring, spending and inflation were hotter in January than expected, and data revisions showed inflation and demand for labor didn’t slow as much as initially reported late last year.
Mr. Powell said data on hiring, spending, factory production and inflation partly reversed softening trends seen just a few weeks ago. Some of the upswing could reflect unseasonably warm January weather that can interfere with seasonal adjustments to economic data, he said.
“Still, the breadth of the reversal along with revisions to the previous quarter suggests that inflationary pressures are running higher than expected at the time of our previous [policy-setting] meeting,” Mr. Powell said.
The Fed has been trying to curb investment, spending and hiring by raising rates, which makes it more expensive to borrow and can push down the price of assets such as stocks and real estate. The fed-funds rate influences other borrowing costs throughout the economy.
Mr. Powell’s testimony this week will be his last scheduled public remarks on interest-rate policy, and a final chance to shape market expectations, before the Fed’s next meeting, March 21-22. Officials begin their premeeting quiet period on Saturday.
In December, most Fed officials thought they would raise the fed-funds rate this year to between 5% and 5.5% and hold it there into 2024. They will submit new projections at the coming meeting.
Several Fed officials have indicated in recent weeks they could raise rates this year more than previously projected. Three regional Fed bank presidents have said they could have backed a larger half-point increase last month or would do so at the coming meeting.
The recent strong economic data shifted investors’ rate expectations. When the Fed last met, investors in interest-rate futures markets anticipated officials would raise the fed-funds rate just once more this year, to a peak of 4.9%, and begin cutting it this fall. On Monday, investors anticipated the rate would rise to around 5.5% by midyear and remain there through the end of 2023, according to CME Group.
Mr. Powell could face limits in guiding markets this week because two widely watched economic reports that could influence officials’ deliberations are set to be released after he testifies and before the next Fed meeting. The Labor Department is scheduled to report Friday on February hiring. Next week, it is set to release its February inflation report.
Employers added 517,000 jobs in January, a figure that shocked economists who were anticipating hiring to slow, while the unemployment rate declined to 3.4%, a 53-year low. Friday’s labor report could offer clues on whether the gain was a blip or a sign of an economy that is accelerating.
Inflation’s decline late last year stalled in January. The 12-month inflation rate, excluding volatile food and energy items, was 4.7%, up from 4.6% in December, as measured by the Commerce Department’s personal-consumption expenditures price index.
After holding the fed-funds rate near zero after the pandemic hit the U.S. economy, officials lifted the rate more over the past 12 months than any time since the early 1980s. Officials have slowed the pace of increases to see the effects of their moves.
Tuesday’s hearing marks Mr. Powell’s first appearance before Congress since last June, when the Fed had lifted the fed-funds rate to a range between 1.5% and 1.75%.
A handful of Democratic lawmakers who consistently played down inflation worries in 2021 have warned Mr. Powell against raising rates too fast or too high. They have expressed concern the Fed leader is too eager to slow down the economy by seeking increases in unemployment.
CTAs are minnows, not whales
Tall trend-following tales
Since the dawn of finance there have been big traders and small traders, and small traders have fantasised about predicting the intentions of big traders. If you can guess what a George Soros type is about to do (without using inside information) then front-running their trades is a route to easy money.
The problem is that big traders aren’t always as predictable as the rest of us would like. Most of the good ones subscribe to Keynes’ motto: “When the facts change, I change my mind.” Potential front-runners would prefer the minds of Soros and other whales to remain firmly unchanged. — it would be easier to predict what they might do next.
But there is a class of big traders whose movements might be a little easier to predict: Commodity Trading Advisor (CTA), also confusingly known as managed futures. CTAs generally run systematic trend-following investment strategies. And systematic traders that stick to the same strategy should be easier to anticipate.
Total hedge fund assets devoted to systematic trend-following are probably around $300bn. More than enough to spark the interest of potential front runners. As a former CTA guy myself my interest was therefore naturally piqued by this recent ZeroHedge article.
The article is apparently “SO GOOD, IT’S FOR PREMIUM MEMBERS ONLY”. But it mostly quotes from various pieces of Goldman Sachs research which model the likely positioning and flow of the CTA industry.
I should say in advance that I have nothing but the greatest respect for the good burghers of Goldman Sachs, and I am sure that their research is of the highest quality. But I find ZeroHedge’s reporting to be . . . somewhat hyperbolic.
Let us take a step back, and consider how we can model the behaviour of a hedge fund, or group of such funds.
It’s possible to obtain lagged data about positions from public filings like the 13-F form in the US, or from investor reports. Banks like Goldman Sachs also have access to more timely flow data from their various roles as algo providers, intermediaries or prime brokers. Using simple statistical techniques (or gimmicky machine learning as per your preference), you can model how historic flows reacted to changes in price. Then it’s possible to infer likely trading patterns if a given change in prices occurs.
There are a few wrinkles to consider when we try this strategy in the managed futures world.
First the bad news: it’s much harder to get position data in futures markets, which is the primary tool of many CTAs. You can use the CFTC’s’s weekly commitment of traders report, but that lumps in CTA exposure with a whole variety of other market participants. Apart from a few UCITS funds that have to publicly report exposures, you are mostly relying on lagged and incomplete private information. Accurate flow data is also difficult to find. Because futures trading venues are centralised, most CTAs bypass intermediaries to trade directly on exchanges, usually with their own internal algos.
But there is some good news. We know that these funds are mostly looking for trends, and it’s relatively easy to create your own trend-following strategy with a spreadsheet or a few lines of code. Pump in some data for historic prices, plus some price expectations, and you too can model CTA behaviour. Even quite simple trend strategies can do a reasonably good job of forecasting flow. Plus if you happen to be working at Goldman Sachs, you can augment a basic trend model with private data on positioning and trades.
A significant caveat: the strategies used by most CTAs are not the sort of technical analysis used by your typical retail punter, where positions are closed immediately once some mysterious ‘pivot level’ is reached. A large fund which closes their entire position in a single day will move the market significantly and suffer massive slippage. This would be a bonanza for potential front runners, but the vast majority of CTA managers are not that stupid. Instead, they continuously evaluate their positions depending on the current trend strength. Any selling due to the market trend turning negative will be slow and gradual.
The Goldman graph in the ZeroHedge article estimated that CTAs are currently long almost $100bn, and could eventually go short by over $100bn if the market sells off enough (apols for blurriness):
Visually, it looks like they are going from their maximum long to (potentially) a maximum short. This happens over a month, which is a plausible horizon given the typical trading speed of most CTAs. Nevertheless, is it really realistic to expect CTAs to dump $200bn of S&P 500 futures in a month?
Firstly, a total US equity position of $100bn when the entire industry manages about $300bn is a somewhat heroic assumption. Okay, CTAs use leverage. But even if we assume a very generous ratio of exposure to AUM of four, that would imply that they have just over 8 per cent of their risk capital allocated solely to the S&P 500. Given most CTAs try and allocate across dozens or hundreds of instruments, representing multiple asset classes, it’s pretty unlikely that the industry as a whole has nearly 10 per cent in just one market — even if that market is US equities.
In fact although the ZeroHedge article talks at length about the S&P 500, the headline $220bn in the original GS research actually refers to the entire global equity market. If you peer carefully at a blurry spreadsheet in the article, you can see that the S&P 500 flow in the worst scenario is a mere $44bn. That would imply an industry risk weighing to the S&P 500 of around 2 per cent — much more plausible.
Secondly, most CTAs adjust their position according to volatility. To have the same magnitude of short position on as they currently have long would require the market to sell off significantly, without any increase in risk estimates. But equities are famous for becoming more volatile when they are going down. It’s more likely that the position on the short side will be smaller than the current long, resulting in a smaller adjustment trade.
Finally, it seems pretty unlikely that CTAs are currently at a maximum long position. Even without a fancy trend-following model, you can see from any chart that the market is hardly in the sort of prolonged upturn that would produce a strong long signal, even if it has been a remarkably sedate bear market.
But let’s be generous and assume the $44bn figure is roughly correct. Is that degree of selling likely to cause a massive downward spiral in stock prices? Whilst $44bn sounds like a lot, it’s actually less than one per cent of the monthly volume in S&P 500 futures. Even ZeroHedge’s $200bn figure is about 3 per cent. Any trading by managed funds will be drowned out by a cacophony of orders from the rest of the market.
The truth is that CTAs are mere minnows in most markets they trade. Even if you could predict their trading flows perfectly, it’s never going to be a sure-fire route to front-running profits. Instead, perhaps Soros can be persuaded out of retirement?
Gapping down
In reaction to earnings/guidance:
- CARA -27.7%, THO -9.8%, CVGW -8.7%, NTNX -5.8%, BB -4.8% (guidance), KEY -2.8% (reduces FY23 net interest income outlook), DOMO -2.7% (also names new CEO and CFO), FERG -2.6%, MCRB -2.2%, SEAT -1.9%
Other news:
- ZYXI -11% (postpones Q4 results)
- RIVN -7.6% (intends to offer $1.3 bln of green convertible senior notes due 2029)
- NTNX -5.8% (filed to delay its 10-Q)
- GSBD -5.2% (prices offering of 6.5 mln shares of common stock for gross proceeds of ~$99.1 mln)
- LVLU -3.2% (appoints new CFO)
- DXC -2.9% (terminates discussions regarding potential takeover)
- CDNA -2% (not participating in scheduled conference)
- PSN -1.5% (awarded contract)
- HUT -1.3% (reports 156 Bitcoin mined in February)
- HLNE -0.9% (prices offering of 671737 shares of Class A common stock for gross proceeds of ~$51.7 mln)
Analyst comments:
- JOBY -3.6% (downgraded to Sell from Hold at Deutsche Bank)
- APAM -2.7% (downgraded to Sell from Neutral at Goldman)
- LSPD -2.4% (downgraded to Market Perform from Outperform at MoffettNathanson)
Gapping up
In reaction to earnings/guidance:
- WW +13.7% (also buying Sequence for $106 mln net), SQSP +13.6%, SE +10.1%, DOLE +5%, DKS +4.8%, TCOM +2.9%, ESAB +2.1%, GWRE +1.4%, SWIM +1.2%, VRNA +1.1%, AVAV +0.5%
Other news:
- GSAT +2.6% (collaborating with Qualcomm)
- TDW +2.1% (acquires 37 platform supply vessels from Solstad Offshore)
- TEAM +1.9% (rebalancing of resources resulting in the elimination of certain roles impacting about 500 full-time employees or approximately 5% of the Company's current workforce)
- IONS +1.2% (FDA accepts NDA for eplontersen)
- SNY +1.1% (Sanofi and Regeneron Pharmaceuticals (REGN) report Dupixent accepted for FDA review)
Analyst comments:
- ANET +1.3% (initiated with a Buy at Goldman)
- JNPR +1% (initiated with a Buy at Goldman)
- COST +0.7% (upgraded to Buy from Neutral at Northcoast)
Jerome Powell to Testify to Congress on Outlook for Rates, Inflation
Fed chair’s appearance offers opportunity to shape policy expectations ahead of March meeting
Federal Reserve Chair Jerome Powell is likely to caution on Capitol Hill that strong economic activity this year could lead U.S. central bank officials to raise interest rates more than they expected to combat high inflation.
Mr. Powell is set to testify for two days, starting Tuesday at 10 a.m. Eastern time before the Senate Banking Committee and continuing Wednesday before a House committee. They will be his last scheduled public remarks on interest-rate policy, and a final chance to shape market expectations, before the Fed’s next meeting, March 21-22. Officials begin their premeeting quiet period on Saturday.
The Fed raised its benchmark federal-funds rate by a quarter-percentage-point to a range between 4.5% and 4.75% last month in an effort to reduce price pressures by cooling the economy. It slowed the pace of rate rises following increases of a larger half-point in December and 0.75-point in November.
The Fed has been trying to curb investment, spending and hiring by raising rates, which makes it more expensive to borrow and can push down the price of assets such as stocks and real estate. The fed-funds rate influences other borrowing costs throughout the economy.
In December, most Fed officials thought they would raise the fed-funds rate this year to between 5% and 5.5% and hold it there into 2024. They will submit new projections at the coming meeting.
At a Feb. 1 press conference, Mr. Powell indicated that if the economy slowed as officials expected, they could raise rates by a quarter-percentage-point at each of their meetings in March and May.
But he also cautioned they could raise rates more if the economy showed surprising strength.
“We’re going to be looking carefully at the incoming data between now and the March meeting,” Mr. Powell said at the press conference. “If we come to the view that we need to…move up rates beyond what we said in December, we would certainly do that.”
Since he made those comments, several economic reports have revealed hiring, spending and inflation were hotter in January; moreover, revisions showed inflation and demand for labor didn’t slow as much as initially reported late last year.
As a result, several other Fed officials have indicated they could raise rates this year more than previously projected. Three regional Fed bank presidents have said they could have backed a larger half-point increase last month or would do so at the coming meeting.
The recent strong economic data shifted investors’ rate expectations. When the Fed last met, Feb. 1, investors in interest-rate futures markets anticipated officials would raise the fed-funds rate just once more this year, to a peak of 4.9%, and begin cutting it this fall. On Monday, investors anticipated the rate would rise to around 5.5% by midyear and remain there through the end of 2023, according to CME Group.
Investors will be parsing Mr. Powell’s language closely for clues about whether the Fed is likely to raise rates by a quarter-point, as widely expected, or whether he might indicate openness to a larger half-point increase.
Mr. Powell could face limits in guiding markets this week because two widely watched economic reports that could influence officials’ deliberations are set to be released after he testifies and before the next meeting. The Labor Department on Friday is set to report on February hiring. Next week, it is set to release its February inflation report.
Employers added 517,000 jobs in January, a figure that shocked economists who were anticipating hiring to slow, while the unemployment rate declined to 3.4%, a 53-year low. Friday’s labor report could offer clues on whether the gain was a blip or a sign of an economy that is accelerating.
Inflation’s decline late last year stalled in January. The 12-month inflation rate, excluding volatile food and energy items, was 4.7%, up from 4.6% in December, as measured by the Commerce Department’s personal-consumption expenditures price index.
After holding the fed-funds rate near zero after the pandemic hit the U.S. economy, officials lifted the rate more over the past 12 months than any time since the early 1980s. Officials have slowed the pace of increases to see the effects of their moves.
Tuesday’s hearing marks Mr. Powell’s first appearance before Congress since last June, when the Fed had lifted the fed-funds rate to a range between 1.5% and 1.75%.
A handful of Democratic lawmakers who consistently played down inflation worries in 2021 have warned Mr. Powell against raising rates too fast or too high. They have expressed concern the Fed leader is too eager to slow down the economy by seeking increases in unemployment.